View from the Observation Deck

1. The chart above shows the quarterly venture capital (VC) flows into Internet-related and biotechnology companies over the past decade. These two themes, along with traditional technology industries, have consistently been the most popular.
2. Historically speaking, many retail investors have been interested in knowing what the so-called “smart money” is buying. Smart money is somewhat synonymous with institutional/high net worth investors.
3. VC investing is speculative in nature. Capital is funneled into companies at various stages of development. A stake in a biotechnology firm, for example, could hinge on the success of a single new drug or medicine.
4. While VC investors are looking to get in at or about the ground floor of an opportunity, ultimately, the financial reward is realized when (and if) the company they invest in goes public (IPO).
5. Retail investors can participate and seek to prosper in these same themes by investing in established companies already listed on an exchange.
6. From 12/31/01-12/31/11 (same span as in chart), the Dow Jones Internet Composite Index and NYSE Arca Biotechnology Index posted cumulative total returns of 135.8% and 88.1%, respectively. The S&P 500 returned 33.3%. (Past performance is no guarantee of future results.)

View from the Observation Deck

1. The S&P 500 Financials Index has posted a total return of 13.4% year-to-date through 2/21. It is the second-best performing sector to technology, which is up 14.2%, as measured by the S&P 500 Information Technology Index
2. Financials were the worst performing major sector in 2011. The S&P 500 Financials Index plunged 17.1% last year. To date, this year’s rally has simply been recouping most of last year’s sell-off.
3. While we admit that valuations are attractive, we do suggest that investors consider purchasing shares of financials based on a multi-year time horizon.
4. This would allow the banking institutions, in particular, to navigate all of the new regulations coming. Reportedly, only about 25% of the 400 new rules in the Dodd-Frank Wall Street Reform and Consumer Protection Act have been finalized.
5. RealtyTrac expects the number of home foreclosure filings to rise from 1.9 million in 2011 to between 2.2 million and 2.5 million in 2012 now that a settlement ($25 billion) has been reached between the states and mortgage servicers.
6. The silver lining for investors is twofold: Earnings have been improving since the 2008 global financial crisis (see chart) and the S&P 500 Financials Index is currently trading approximately 60% below its 10-year high on 2/20/07.
7. Keep in mind that we are in an election year. The Republicans believe that there is too much regulation and would like to curb Dodd-Frank. We’ll know more after November 6.